A new survey, released by PricewaterhouseCoopers LLP (PwC) and the Confederation of British Industry (CBI) highlights an “unexpected rise in employment,” as well as growth and “modest optimism” in the UK’s financial services sector, including Britain insurers and brokers.
“The volume of business in the financial services sector grew for the eighth quarter running, at well above the average pace, in the three months to March, ” according to the survey. “This growth is reflected in the first rise in optimism among financial services firms (+32 percent) in a year and an unexpected increase in employment in the sector (a balance of +19 percent). Companies also plan to invest more in IT over the next year.
“Of the 95 financial firms that responded, 44 percent saw volumes rise in the quarter to March, and 21 percent reported a fall. The resulting balance of +23 percent was well above the long-run average (+12 percent) and driven primarily by business with private individuals. In the coming quarter, companies expect growth to accelerate somewhat (+34 percent), again mostly coming from business with individuals.
“The rise in incomes was driven by fee, commission, or premiums (+13 percent), with the value of net interest, investment or trading remaining flat (+3). Meanwhile, average spreads widened further this quarter (+11 percent), building on already solid growth in the previous quarter (+43 percent).”
The survey also found the “growth in income more than offset the impact of the sharp increase in total costs, allowing profitability to rise more rapidly than in the previous three quarters (+21 percent).”
There were also more people employed in the financial services sector as it “rose unexpectedly (a balance of +19 percent compared with an expectation of -18 percent). A similar increase is expected in the next quarter (+20 percent).
“Financial services firms resumed investment in both marketing (+16 percent) and information technology (+47 percent) in the three months to March, after a slack period last quarter. Spending intentions for IT were the strongest in a year, as financial services companies looked to increase efficiency.
“As has been the case over the last year, companies continue to cite uncertainty about demand (+55 percent) and inadequate net return (+46 percent) as the factors most likely to limit capital expenditure over the next twelve months. The number of firms highlighting the shortage of labor as a significant constraint increased this quarter (+35 percent).
“Level of demand (75 percent) and competition (52 percent) continued to be the two most significant factors likely to constrain business expansion in the coming twelve months.”
Ian McCafferty, CBI Chief Economic Adviser, offered the following comments on the survey’s findings: “Financial services sales volumes and income continued to rise this quarter, putting the sector’s recovery on a firmer footing. Optimism levels and business investment intentions have also improved, in contrast to last quarter as some of the worst risks around the euro area crisis have eased.
“The unexpected rise in employment is a further encouraging sign for the sector. But with the current level of business regarded as below normal, conditions still remain challenging for financial firms.”
The survey then analyzed each sector of the UK’s financial services industry. Even though the insurance industry has been affected by the ongoing economic crisis, it continues to be a more or less solid rock in an angry sea, as well as a cornerstone of the UK’s financial services industry.
The PwC, CBI survey analyzed the insurance industry’s various component parts as follows:
Life insurance
Business volumes increased for a ninth consecutive quarter, with further growth expected in the next three months. Income expanded modestly, but stronger rates of growth are forecast. Life insurers reported an unexpected rise in profitability and optimism about the business situation rose marginally. There was a rise in headcount and a further increase is expected. Investment intentions are reported to be above average.
General insurance
Optimism amongst general insurers rose very modestly over the three months to March. Business volumes expanded slightly for the second consecutive quarter, although more slowly than expected, and growth is expected to accelerate over the next quarter. Profitability rose strongly over the past three months and is expected to rise robustly in the next quarter. Average commissions, fees and premiums paid rose at their fastest rate since December 2010 and are expected to rise at a similar pace next quarter.
Insurance brokers
Optimism amongst insurance brokers rose in the three months to March. Business volumes fell for the third consecutive quarter albeit at a slower pace than in the previous two quarters. However, volumes are expected to grow strongly in the three months to June. Overall profitability rose for the first time in a year, albeit modestly, and is expected to rise again next quarter at a slightly faster pace. Insurance brokers are planning to spend more on IT in the year ahead, driven by a need to increase efficiency/speed and by replacement.
Mark Stephen, UK Insurance Leader at PwC, commented: “There are a number of reasons for general insurers to be feeling positive as business levels are growing, price increases are starting to come through and claims growth is slowing at last. This positive backdrop has given insurers the confidence to start hiring again – a welcome reversal after two quarters of headcount reductions. However, the commercial sector is an area of concern as business has fallen to disappointing levels.
“Strong rises in customer demand and levels of new business has finally ended life insurers’ run of pessimism. This positive backdrop is allowing life insurers to invest heavily in IT, marketing and performance measurement to ensure they are well placed to respond to the upcoming retail distribution review and the challenges it will bring. Life insurers are also looking to boost staff numbers, although there are concerns over the availability of professional staff due to the range of investment and regulatory projects companies are tackling.”
The survey also analyzed the banking sector, reporting a “notable rise in optimism, with business volumes expanding for a second consecutive quarter, and a similar rate of growth expected in the three months ahead.”
This is somewhat mitigated by rising costs, which the survey said rose “sharply over the past three months. Despite growth in business volumes and income values, the rise in costs prevented any growth in profitability.” The sector, however, did manage to increase the number of employees, and is expected to continue to do so, especially as it increases IT expenditures.
Building societies, i.e. mortgage lenders, are also more optimistic, as their “business volumes grew at the fastest pace since June 2011 this quarter, despite predictions that volumes would remain broadly flat.” Overall business, however, “was seen as below normal,” and is expected to remain “broadly flat in the coming quarter.”
Finance houses, mainly investment managers and advisors, were also more optimistic, despite lower business volumes, which “fell strongly over the last quarter, and finance houses reported the level of business as below normal. However, a solid rise in volumes is expected next quarter.”
Kevin Burrowes, UK Financial Services Leader at PwC commented: “”More positive economic data and a slightly more stable environment in the euro zone mean that banks are much more confident about their sector. This confidence is translating into recruitment with many banks reporting that they plan to increase headcount over the coming months. Banks are also planning to invest in their businesses, particularly in their digital offerings, and customers should reap the rewards of this.
“The picture is not so rosy for building societies which, while displaying more confidence than in the last quarter, are still concerned about asset quality and the impact of the regulatory burden. However, the relatively high level of home loan approvals in December and less turmoil in the euro zone mean that confidence among building societies is higher than in the last quarter.
“There are still choppy waters to be navigated and, as ever, stringent cost and risk management will be key.”
Sources: PricewaterhouseCoopers LLP (PwC) and the Confederation of British Industry (CBI)
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